Economy: Construction Comeback

In Georgia, the nonresidential construction industry’s recession ended in 2012, however, a meaningful recovery did not begin immediately. The pipeline of privately financed projects was empty and the number of new speculative projects was almost zero. In 2014-15, private spending for nonresidential construction increased, and the upturn will gather momentum in 2016.

The office, industrial, retail and government subsectors of the industry will all see improvements of some sort over the next year.

Credit will continue to loosen for those looking to build nonresidential but will remain a headwind for markets with high vacancy rates. Nonetheless, Georgia’s population growth as well as corporate relocations and expansions will generate gains in net occupancy.

Office and retail vacancy rates remain elevated but should improve due to limited deliveries of new space and less sublease space coming onto the market. Consequently, tenants will not have the upper hand in lease negotiations to the extent that they did in 2009-2013.

Overall spending for new office construction will increase in 2016, but nearly one out of every five offices in the Atlanta metropolitan area is vacant. Atlanta’s office vacancy rate therefore is one of the highest in the nation. Given investors’ aversion to risk, the high vacancy rate will be a barrier to new development.

Georgia’s above-average job growth will continue, which will lead to an increase in net office occupancy in 2016. Overall rents for office space are likely to rise in 2016, but the gains will be stronger for Class A space in high-demand markets. Net absorption of vacant space will occur. The strong U.S. dollar means that foreign investors will be slightly less keen to take advantage of the market for U.S. real estate. However, investors will focus on international gateway markets like Atlanta that have relatively good prospects and vigorous links to global supply chains. These trends imply that the down cycle in the nonresidential real estate is over, but that the up cycle is not too vigorous.

More positively, compared to many major metropolitan areas, office rents in Atlanta are a bargain and will remain so for an extended period. That’s a big problem for owners of office buildings and could be an issue for investors and developers. However, it represents an opportunity for the state to aggressively recruit new businesses to the Atlanta region. It’s hard to think of another large U.S. metropolitan area where the prospects for economic growth are so strong and office rents are so affordable.

Because warehousing, distribution and manufacturing have been outperforming the overall economy, the situation in Georgia’s industrial property market is much better than that of the office market. Since 2010, Atlanta’s industrial vacancy rates have declined sharply and are now relatively low. Demand for new industrial space will rise significantly in 2016. In turn, rents will also rise. Georgia has landed a number of economic development projects that will require large amounts of build-to-suit space. Plus, spec construction is back and will increase in 2016.

The industrial properties with the best prospects are warehouse and distribution facilities that are positioned to take advantage of Georgia’s growing role as a major distribution and logistics center. The superb performance of Georgia’s ports will ensure healthy demand for warehouse and distribution space in Savannah, Macon and Atlanta, and other areas with high port dependence.

When it comes to the retail subsector, high – albeit declining – vacancy rates and the ongoing, fast-paced restructuring of retailing favors e-retail over brick-and-mortar locations, and there will be limited construction of new retail space in 2016. Spending for the renovation of existing retail space will rise, fueled in part by specialized small-format grocery stores.

In many local jurisdictions, spending for publicly funded structures will increase, reversing the downtrend of recent years. The primary headwind for public construction is that the property bust led to downward adjustments in assessed property values. Typically such adjustments lag movements in market prices by a year or more. So local governments’ property tax bases gradually are becoming more supportive of revenue collections and in turn public construction. Also, in some areas, heady population growth will provide an easy justification for higher construction outlays. The challenge will be to find the funds to finance such projects.

Categories: Economy